Draft borrowing and capital spending plan 2011/12 to 2017/18

Report: 11
Date: 25 November 2010
By: Director of Resources on behalf of the Commissioner

Summary

This report provides progress on the development of the capital programme for the period 2011/12 to 2017/18 and the funding implications under consideration.

A. Recommendation

That Members

1. note the process and progress in developing the 2011/12 to 2017/18 Capital Plan.
2. agree the annual statement regarding the 2011/12 Minimum Revenue Provision and the key Prudential Indicators calculated from the draft borrowing and spending plan.
3. approve a provisional programme:
   • For 2011/12 to a fully funded value of £185.9m, with an over-programming limit of £37m, 20% of funding.
   • For 2012/13 to a fully funded value of £133.4m, with an over-programming limit of £26.6m, 20% of funding.
4. note the continuing development to finalise a programme for 2011/12 in response to confirmation of grant options, borrowing limits and other funding sources.

B. Supporting information

Background

1. The Mayor’s budget guidance for 2011/12 was issued in May. It required that a borrowing and capital spending plan be included as part of the MPA overall budget submission to the Greater London Authority. The guidance required a planning horizon of three financial years. However, the Authority has a continuing seven year programme as this allows a longer term perspective to be employed and a more strategic view of replacement and updating of operational assets.

2. Following the Government’s pronouncements in the Comprehensive Spending Review the Mayor acknowledged in his letter of 22nd October that ‘…the uncertainty over future Government grant levels may make it difficult for you (MPA) to fully comply with the content I originally sought…’. ‘The revised requirement for this submission is a focus on… Submitting a draft Capital Spending Plan and borrowing limits.’

3. This report covers the current draft programme for 2011/12 to 2017/18 with considerations of the uncertainties on grant levels and the potential for increasing borrowing to meet the Authority’s needs to have reasonable operational assets.

Capital Strategy

4. The Capital Strategy, as approved by the Authority in July 2007, represents the framework upon which to consider the investment needs of the Service. It requires proposed projects to be assessed against business priorities, while giving due consideration to the resource constraints. As such it informs financial and business planning and provides the necessary focus to analyse the affordability, prudence and sustainability of investment proposals. These are requirements of the Prudential Code which the Authority is statutorily required to adhere to.

5. The strategy is now due for a review as it needs to reflect the new strategy and direction as proposed in the Policing London 2010-2013 Plan as well as the funding changes necessary following the Comprehensive Spending Review. The strategy will be reviewed by March 2011. It will need to consider the levels of funding necessary to sustain a well maintained fixed asset base appropriate to the future needs of policing London. The capital Programme will be aligned to the Capital Strategy as finally approved.

6. The Capital Strategy is underpinned by the Property Strategic Plan, the Information Technology Strategic Plan and the Transport Strategic Plan/Asset Management Plan.

Stewardship of the Capital Programme

7. The Capital Programme Steering Group (CPSG) has now been in operation for a year making improvements to the stewardship of projects and programmes. Some of this function has been delegated to the DoI Projects Board and the Property Services Programme Board where the day to day delivery and monitoring of individual projects is governed. The CPSG reviews overall performance against programme budgets as well as directing the internal processes for rolling the capital programme year on year.

8. Underspending continues to be an issue in the management of the capital programme, although unused funds can often be carried forward through reserves to support projects at a future date. The failure to use resources when expected continues to represent unused opportunities to improve operational assets at the earliest opportunity. It is however, important to recognise that ‘slippage’ in major contracts will occur from time to time and to ensure that alternative schemes are available to optimise the use of available resources. This is dealt with by agreeing an ‘opening’ programme in excess of available funding in the year and then managing project delivery to a successful out turn.

9. The implementation of the Investment and Project Management components of SAP will be completed in December 2010 as part of the Developing Resource Management Programme. This will provide a single database source for corporate financial reporting moving away from a multitude of separately maintained spreadsheets. This will improve timeliness and accuracy of information for CPSG which will increase control and governance.

Review of Capital Programme 2010/11 to 2016/17

9. The MPA Strategic and Operational Policing Committee approved the Policing London 2010-13 Business Plan on 1 April 2010. The Borrowing and Capital Spending Plan 2010/11 to 2016/17 and related prudential indicators formed part of this plan.

10. Capital budget preparation guidance issued in 7 May 2010 requested provisioning departments, in consultation with business groups, to provide information to enable a capital programme for the period 2011/12 to 2017/18 to be prepared. The guidance was clear in stating that the projects put forward for consideration must be based on the Capital Strategy and support the MPS Strategic Objectives. It was also made clear that little opportunity for additional finance was available and that provisioning departments should work to the same level of allocation as provided within the presently approved capital plan.

11. The returns from the provisioning departments included new projects, slippage from the current year and changes to the estimated values of individual projects. Consequently the demand far outstrips the finances available.

Borrowing

12. The Capital funding plan utilises the previously approved annual borrowing at £40m per annum throughout the 7 year period. Additionally we are planning to increase borrowing by £18m p.a. to cover the anticipated shortfall in Home Office Grant. We are also considering the implications of the use of Revenue Contributions to Capital Outlay and the use of reserves to defray borrowing.

13. When the grant position clarifies we’ll be in a position to finalise our borrowing strategy against available headroom. This may lead to a requirement for changes to the Authorised Limits and the Operational Boundary.

Capital Programme 2010/11

14. The MPA Finance & Resources Committee agreed a revised Capital Programme budget on 15th July 2010 at £276.3m for 2010/11 following the first quarter review. This is the value that the MPS is targeting to achieve. This target represented a gross programme valued at £309.6m with a slippage factor, also known as over-programming, of -£33.2m resulted in a revised budget of budget of £276.3m.

15. At the close of September 2010, period 6 programme and project management had successfully removed the over-programming value. However, changes in some strategies, a challenging review of project estimates and delays to procurement lead to a current forecast out-turn of £253.4m. This is being challenged to bring the value back up to budget to ensure important operational assets are commissioned to time to meet performance targets and revenue budget savings.

Draft Capital Programme 2011/12 to 2017/18

16. In preparing the draft capital programme 2011/12 to 2017/18 it has been necessary to:

• Recognise the committed schemes delayed or slipping from 2010/11, expected to carry their 2010/11 funding with them into 2011/12.
• give due consideration to those projects that have specific funding sources e.g. specific grants, third party contributions, SIP funds, revenue contributions and earmarked reserves.
• Consider the organisational priority and timeliness of specific projects with obligations on delivery times. e.g. Olympics is time and finance constrained.

17. A prioritisation model has been reintroduced into the organisational development of the programme. This enabled a first pass ranking which has clarified the programme for the business groups to consider the implications and timing of projects in a structured manner. A series of reviews have been held between the project providers and the user business groups over recent weeks to tune the project sequencing. Added to this has been a challenging view of business need, project scope and estimation which has yielded reductions in project estimates overall. The value in the aspirational programme is changing but still exceeds funding by £479.4m over the plan period.

Table 1: Demand for Capital Investment by Providing Department

Table 2: Project bids v Funding

Table 3: Proposed Expenditure by Business Group

18. Some scenarios are being modelled for corporate consideration. For example:

Scenario 1: Limit the first two years of prioritised projects to a total value of funding limit + 20% over-programming. The latter 5 years restricted to funding levels without any over-programming allowance.

Scenario 2: As per scenario 1 but with a reduced funding value accepting that the loss of Home Office grant is not recovered by additional borrowing.

In both scenarios any projects unfunded are then postponed to post 2017/18, or considered for cancellation.

The use of the scenarios in this way clarifies which asset deliveries are at risk and they pave the way for the next iteration with the business groups. Moreover, adopting a scenario will give the MPS a clearer direction of project imperatives.

It is recommended that Scenario 1 is adopted. The implications for projects at risk or deferred is being worked through by the Provisioning departments.

19. A proposed funding position for the Programme is shown at Appendix 1 The Capital Receipts over the plan period have been retained as per last year’s plan i.e. £40 m p.a. for the plan period. The sustainability of this throughout the planned period is dependant on a range of factors such as the London economy and the marketability and supply of surplus properties for sale. When receipts fall, as they will in the long run, without any support by grant we will have to borrow or seek a raise in precept to maintain investment levels.

Way forward

20. It is recommended that the capital programme be limited to the completion of projects already committed and underway, falling due in 2011/12, and the high priority projects as shown within Appendix 2. These projects have been prioritised to reflect specific obligations and meet the Authority’s objectives.

21. For 2011/12 a budget limit of £185.9m is proposed, subject to additional sums carried forward from any budget under achievement in 2010/11 yet to be determined. The authorised programme is proposed to total no more than £223.0m, allowing for an initial over-programming of 20% to compensate for programme slippage. The programme will be managed within a budgeted value of £185.9m.

22. The Business Group Heads have been consulted on the capital investment needs and prioritisation within the proposed budget levels. They are aware that new proposals can be added or future projects brought forward subject to a compensating deferral or cost reduction on an approved project.

23. As at 1 April 2011 there are planned to be £19m of Capital Reserves which could be used in support of the programme. Consideration will be given to the extent these are to be deployed in the plan period when the grant position clarifies. However, there are a number of high value projects whose priority will escalate over time which may demand the use of these reserves two or three years into the programme. An example being Command & Control Futures (hardware & software for control rooms to despatch response effort) which may be fundable in 2011/12 but presents a £30m problem for 2012/13 & £35m in 2013/14.

24. The funding for 2011/12 onwards is dependent on a sustainable stream of capital receipts from the Estates Rationalisation programme at £40m p.a. Should this not mature then the Authority will need to consider further borrowing options to make up the shortfall against current plans or further reduce investment plans.

25. The Capital Programme 2011/12 - 2017/18 will form part of the overall budget submission to the MPA and then the Mayor of London. However, to ensure the MPS are able to confidently deliver the programme it will be necessary to start planning and procurement of planned new starts before the budget is agreed and based on this draft plan. All projects will be subjected to the normal governance processes.

Prudential indicators

26. Based on the estimated funds available to finance the draft Borrowing and Capital Spending Plan 2011/12 - 2017/18 an updated set of key Prudential Indicators has been prepared. These are attached in Appendix 3. These take into account the proposed funding decisions outlined in this report and summarised in Appendix 1.

27. The Local Authorities (Capital Finance and Accounting ) (England) (Amendment) Regulations require the Authority to approve an annual statement regarding the amount of money to be set aside from revenue funds to meet the repayment of borrowing undertaken to support capital investment. This is known as the Minimum Revenue Provision (MRP) and is also included in Appendix 3.

Appendix 2 is exempt.

C. Other organisational & community implications

Equality and Diversity Impact

1. Equality Impact Assessments are completed on business group activities undertaken where there is deemed to be an impact. The equality and diversity implications are identified in business cases and reports on individual proposals through our normal decision making process. The in-year reductions to reflect withdrawal of Government grant are not permanent adjustments to the Service’s base budget. Permanent reductions in the light of the Comprehensive Spending Review will be reflected in the 2011-14 Policing Plan and Budget and will be subject to EIAs as appropriate.

Consideration of MET Forward

2. Met Forward recognises that the MPS has to make challenging financial decisions whilst minimising the impact on front line policing. This report outlines the current financial position against the budget approved by the Authority (Policing London Business Plan, 2011-14) and identifies additional savings to address the deficit.

Financial implications

3. The financial implications are those set out in this report. The Capital Programme is deemed affordable within the proposed revenue budget. Any changes will be made with evaluation against revenue impact and will be reflected in the final programme to be considered by the Authority in March 2011 once the overall budget has been determined by the Mayor of London.

Legal implications

4. This report forms part of the budget development and consultation process to ensure there are sound medium to long term financial plans.

5. The Mayor is required by s122 of the Greater London Authority Act 1999, as amended by the Local Government Act 2003, to prepare, for each financial year, a capital spending plan for the MPA and each other functional body.

6. The statutory procedure requires the Mayor before 15 January to send a copy of the draft plan to the Assembly and each functional body, inviting them to submit written comments on the draft to him within 21 days. Before finally determining the plan the Mayor shall consider any comments submitted in response to this invitation and make any such revisions as he thinks fit, having regard to those comments. The plan must then be sent onwards to the Secretary of State with copies sent to the Assembly and each functional body.

7. The Mayor is required under s3 of the Local Government Act 2003 to determine how much money the GLA and each functional body can afford to borrow. In complying with this duty, Regulation 2 of the Local Authority (Capital Finance & Accounting)(England) Regulations 2003 requires the Mayor to have regard to the Prudential Code for Capital Finance in Local Authorities when determining how much money the GLA and the functional bodies can afford to borrow.

8. Any further legal implications arising from the proposed Capital Programme will be reflected in the final report to the Full Authority on the Capital Programme in March 2011.

Environmental implications

9. There are none specific to this report.

Risk Implications

10. Risk management is integrated into the Service’s budget, business planning and performance management processes. Business Groups and Management Board monitor risks on a regular basis. This report sets out the financial risks and pressures currently being managed by the Service.

D. Background papers

• Policing London 2010-13 Business Plan

E. Contact details

Report author: Nick Rogers, Director of Finance Services, MPS

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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